Amazon.com. Inc. is moving quickly to revamp its delivery network to gain more control over its fulfillment
infrastructure while reining in spiraling transportation costs, according to a supply chain consultant with close
ties to the e-tailing giant.

James Tompkins, who runs Tompkins International, a Raleigh, N.C.-based consultancy, said Amazon has divided the
nation into three segments based on population size: The top 40 markets, which comprise about half of the U.S. population;
the next 60 largest population areas that account for about 17 percent, and the remaining areas, which account for about
one-third.

The top 40 markets will be served by a private fleet being built by Amazon to support an expansion of its online grocery
business, called "Amazon Fresh," according to Tompkins. The next 60 will be served by an array of regional parcel delivery
carriers, he said. The remainder will be served mostly by the U.S. Postal Service, he said.

UPS Inc., which today handles much of Seattle-based Amazon's current deliveries, will not play a prominent role in the network
realignment, Tompkins said. Nor will FedEx Corp., which manages a lesser portion of Amazon's delivery business. An Amazon
spokeswoman was unavailable to comment.

Orders will be routed through Amazon's 55 fulfillment centers, with deliveries made the same day, the next day or, at most,
in two days, Tompkins said. Inventory will be positioned to exclusively support local deliveries. A national delivery network as
operated by providers like FedEx and UPS will be rendered irrelevant because they will be considered too slow to suit the typical
Amazon customer, he said.

Tompkins said that Amazon has a timeline for its rollout, but that he is unaware of the details. "They are moving on this very
aggressively," he said.

Amazon two years ago seriously considered a bid for FedEx as a means of buying into an existing delivery operation, according
to Tompkins. However, Jeffrey P. Bezos, Amazon's founder and CEO, backed away after determining FedEx's network structure was too
national in scope to fit Amazon's strategy of local fulfillment and delivery, Tompkins said. A FedEx spokesman declined comment.

Tompkins has worked in the supply chain management field for decades and is considered one of the nation's leading authorities
on its role in e-commerce. His relationship with Amazon is not clearly defined, a status seemingly more by design than coincidence.
When asked to describe the nature of his involvement with Amazon, Tompkins replied that he was contractually obligated not to
comment.

A "FRESH" EXPANSION
Though Amazon Fresh has been operating for five years, it is today only available in Seattle, San Francisco, and Los Angeles.
However, Amazon plans to expand the grocery business to between 30 and 40 U.S. markets in 2014, according to Tompkins.

Tompkins said the private fleet network would commingle groceries with general merchandise, thus building the scale needed to
make ground shipping cost-effective and to offer a compelling value to customers, Tompkins said. It would also set in motion a
chain of events that would result in Amazon competing with FedEx and UPS.

The online grocery business, which is plagued with high fulfillment costs, is not considered a particularly attractive
enterprise on its own. However, Bezos has used Amazon Fresh as a proving ground to test a more ambitious delivery model rather
than as a way to build a national grocery footprint, according to Tompkins. By using his own vehicles to deliver groceries, Bezos
has been able to fine-tune his own delivery network and understand the pros and cons of leveraging his own infrastructure than
those of the incumbents, Tompkins said. Now Bezos is poised to apply that knowledge on a broader scale, Tompkins said.

Transportation costs remain a thorny issue for Amazon. Its shipping expenses in 2012, the most recent period that full-year
figures were publicly available as of this writing, rose to more than $5.1 billion, up from nearly $4 billion in 2011, according
to the company's 10-K filing with the Securities and Exchange Commission.

Shipping costs in 2012 exceeded shipping revenue by nearly $3 billion, according to the filing. Amazon generates much of its
shipping revenue from third-party merchants who sell products through the company's site and use its fulfillment services for
storing inventory, picking and packing, and shipping.

In the filing, Amazon said it expected its "net cost of shipping"—the ratio of shipping costs to revenue—to continue rising as
parcel rates increase and more customers take advantage of the company's delivery offerings such as "Prime," which charges a $79
annual fee for unlimited two-day deliveries. Amazon has said it is considering a $40 annual price hike for Prime subscriptions.

Not everyone believes Amazon will migrate from FedEx and UPS so quickly. Scott Devitt, Internet analyst for investment firm
Morgan Stanley & Co., said during a late February webcast that Amazon will continue to leverage the established delivery
infrastructure and will not become a disruptive force in the delivery market. Amazon will continue to use its enormous buying
power to extract favorable rates from its delivery partners and will see that as a more attractive alternative to building out its
own network, Devitt said.

Frederick W. Smith, FedEx's founder, chairman, and CEO, told analysts recently that only FedEx and UPS have the delivery
networks capable of efficiently handling the demands of Amazon and other e-commerce providers. Smith said his company, UPS,
and the U.S. Postal Service would remain at the forefront of e-commerce shipping for the foreseeable future.

Tompkins said that Amazon has been planning its strategy long before the well-publicized delivery problems that occurred during
the 2013 holiday season, when about five million of its shipments were not delivered in time for Christmas. Much of the fallout
was laid at the feet of UPS, though some have argued that Amazon erred by understating how many packages were coming UPS' way
toward Christmas day, thus overwhelming the Atlanta-based carrier's air network and triggering the backlog.

Amazon is still smarting from the fiasco, however. The company's fulfillment executives believe UPS and FedEx are not investing
enough in equipment, infrastructure, and other resources to keep up with Amazon's growth, according to a person familiar with the
matter.

These days, every move in the e-commerce space is significant because of its enormous potential. E-commerce has penetrated just
10 percent of the U.S. market, and between 6 and 7 percent of the global market, according to Morgan Stanley estimates. Based on
projected annualized growth rates of 15 percent, e-commerce could be a $1 trillion worldwide business by 2016, according to the
firm.

About the Author

Mark B. SolomonExecutive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.More articles by Mark B. Solomon

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